Documente Academic
Documente Profesional
Documente Cultură
1
THE SECTORIAL REPORT ON
PRINT MEDIA
Submitted by:
Aatif Ansari (01)
Abdullah Tayyebi (03)
Abrez Bhiwandiwala (05)
Abu Talib Khan (07)
Page
2
Executive Summary
Indian Newspaper Publishing - Standing Tall
We believe the Indian Print Media sector offers an excellent opportunity for
investors to cash in on the strong economic growth and emerging
consumerism theme in India. Contrary to popular belief and in defiance of
global trends, Newspaper Publishing in India still stands tall beating
Television in terms of advertising growth. Going ahead, the Rs130bn
Indian Newspaper Publishing industry is expected to register a 13.9%
CAGR in revenues during CY2007-11 largely driven by advertising
revenue. While advertising revenue is basically related to strong economic
growth in the country, we believe Newspaper Publishing in India is set to
grow owing to structural growth drivers like rising penetration, higher
literacy levels and improving affordability of the medium.
Rising newsprint prices has emerged as the key concern for Print Media
companies in India. Capacity rationalisation in North American markets,
lower supplies from China and rising crude oil prices has led to this sharp
hike. However, we believe the impact of rising newsprint prices on Print
Media companies' profitability has already been discounted in the market
as reflected in the sharp fall in the stock prices of Print Media companies
by 30-45% during the last three months. We believe the newsprint prices
are likely to stabilise in 2HCY2008 as the supply situation from China
improves post the Olympics in Beijing. For our Print Media universe, we
have modeled in an 18% rise in newsprint prices in FY2009E from
$600/ton as a base case followed by a 6% jump in FY2010E.
Page
3
Print. We believe such new initiatives will not only help the companies
maximise use of their infrastructure and brands, it will also act as a
stepping stone to unlock shareholder value once the ventures attain
significant size.
Page
4
Indian Media & Entertainment Industry
Over the last several years, Indian Media & Entertainment (M&E) Industry
has consistently outperformed most other sectors in terms of growth.
Standing tall at an estimated size of Rs513bn in CY2007, it is expected to
continue to grow at a steady pace of 18.3% CAGR during CY2007-11.
While traditional segments like Television and Print continue to account for
the largest shares of the overall pie, it is emerging segments like Internet
advertising, Radio and Animation and Gaming, which are expected to
register higher growth. In terms of size, we believe that the Indian M&E
industry has just touched the tip of the iceberg. In CY2007, the Indian M&E
Industry accounted for a mere 0.9% of the Global M&E Industry, which
stood at US $1,432bn and is expected to grow at a CAGR of 6.6% over
CY2007-11.
Page
5
A buoyant economy and extremely favourable demographics are the two
key macro-economic constituents on which the Indian Media industry
stands today. Media Industry generally tends to exhibit cyclical nature
wherein it grows faster when the economy is buoyant and we believe the
time is right for the Media industry to bask in the glory of India Shining
story. In perspective, according to a McKinsey report (MGI India Consumer
Report), if India continues on its steady growth path over the next two
decades, a major transformation will take place in the Indian consumer
market. Income levels will triple and result in India taking over as the fifth
largest consumer market (currently twelfth). Such strong growth and
higher incomes will move over 291mn people out of desperate poverty
and India's middle class will swell by almost ten times from its current size
of 50mn to 583mn people (41% of population/ 128mn households) by
2025. Income growth will be the fastest in the urban areas where average
real household incomes will increase by 5.8% whereas rural incomes will
accelerate by 3.6% over the next two decades. Moreover, as higher
disposable incomes propel consumer spending, more money will flow into
leisure activities giving a steady impetus to M&E Industry. Besides the
macro-economic factors, we believe steady advertising growth, liberal
government regulations and convergence of diverse platforms will be the
key growth drivers for the Media industry.
Page
8
considering allowing FDI upto 74% in segments like DTH, Cable TV and
IPTV. Foreign investment limit in FM Radio is also likely to be increased to
24%.
The year 2007 witnessed the highest FDI inflow lending credence to the
fact that the Indian M&E industry has been gaining favour with the foreign
investors. Thus, while total FDI Earnings of the Information & Broadcasting
(I&B) Ministry stood at $461.8mn levels for the period April 2000 and
December 2007, the nine months of 2007 contributed the lion's share with
an inflow of $215.8mn. Incidentally, the highest FDI inflow for any single
year during 2000-07 was $81.5mn way back in 2000-01. According to the
Department of Industrial Policy and Promotion, FDI fell to a mere $4.5mn
in 2001-02, but then rose to $36.5mn the next year (2002-03) and
touched $56mn in 2005-06 and $43.6mn in 2006-07.
Page
9
Print Media
Notwithstanding the threat from Television and emerging media like
Internet and Radio, the Print Media in India continues to dominate the M&E
space attracting the highest revenues in terms of advertising. In CY2007,
the Print Media segment in India stood at Rs149bn registering a yoy
growth of 16.5%. Newspaper publishing, which accounts for 87% of the
segment, registered a 16.6% yoy growth whereas Magazine publishing,
which contributes the balance, grew at a marginally lower rate of 15%.
Going ahead, Print Media is expected to deliver a 14% CAGR in overall
revenues during CY2007-11 driven largely by advertising revenues as
circulation growth is expected to witness a slowdown.
Page
10
The Big Divide - English v/s Regional
Page
11
Even in terms of overall readership, the Regional dailies (Hindi and
vernacular dailies) dominate the pie with The Times of India being the only
English daily to feature in the Top-10 list. Moreover, the Regional dailies
have a readership: circulation multiple of 7-9 times compared with English
newspapers of 2-3 times. This is primarily due to higher cover prices of
Regional newspapers compared with English newspapers and the readers
of Regional newspapers are generally from the lower socio-economic
segment.
Regional Newspapers enjoy a better distribution of readership TOI
is the only English Newspaper to feature in Top 10
Page
12
English Newspapers command almost 50% of the Print
advertising pie
However, as tier-II and tier-III cities grow in terms of per capita income and
consumer spends, advertisers are gradually opening their eyes to the cost
advantage that the Regional dailies offer vis-à-vis English dailies. Hence,
we expect the wide differential between Regional and English advertising
rates to narrow, albeit gradually, as is evident from the higher ad rate
hikes taken by the Hindi/Vernacular newspapers compared to their English
counterparts. Hence, advertising revenue for the Hindi/Vernacular
language newspapers is increasing at a higher average rate than for the
English newspaper industry. We expect this shift to gain momentum owing
to the following reasons:
Page
13
Regional dailies have grown from 191mn readers to 203.6mn readers
while readership of the English dailies has stagnated around 21mn readers
(NRS 2006). As metros stagnate in terms of readership and circulation,
advertisers are increasingly shifting allocations to non-metros to cash in
on the growing disposable incomes and improving literacy rates in these
regions.
Page
14
We attribute this unique feature to the following:
Niche focus –
In general, Regional newspapers (Hindi + Vernacular) offer local and
regional focus to their readers, often issuing several different regional
editions. The content and circulation of English-language newspapers, on
the other hand, is largely focused on the primary urban centers. Hence,
both enjoy their own set of readers and advertisers, which has left enough
room to expand within.
Lack of funds to invest in new markets has been one of the key reasons
constraining Print Media companies in India to their own regional
strongholds. However, since the government opened the sector to FDI,
Print Media has attracted several big ticket investments. In the Print Media
segment, 100% FDI is now allowed for non-news publications and 26% FDI
is allowed for news publications. Printing of facsimile editions of foreign
journals is now also allowed in India. However, the FDI investments are
subjects to certain conditions including:
Expanding Reach
Beefed up with proper funding, a buoyant economy and better
demographics have seen the Print Media breaking its shackles from the
traditional strongholds to expand into new geographies. The English
domain has seen the highest activity in terms of expansion. In 2005,
Hindustan Times and DNA (Zee Telefilms - Dainik Bhaskar combine) broke
into Mumbai (the largest Print Media market in the country), which has
Page
16
traditionally been a monopoly of Times of India (TOI). While defending its
home turf in Mumbai, TOI has started its own battles denting Telegraph's
market share in Kolkata and Deccan Herald's in Karnataka. The Southern
markets witnessed their own share of action with Deccan Chronicle
venturing outside its home turf of Andhra Pradesh to challenge The Hindu
in Chennai. Buoyed by its success in Chennai, Deccan Chronicle is all set
to enter Bangalore in 1QFY2009. However, TOI, an undisputed leader in
Bangalore, has already entered Chennai to counter attack Deccan
Chronicle and strengthen its presence in South India. Not to be left behind,
Hindi publications have also started expanding. Dainik Jagran has moved
beyond UP strengthening its position in Punjab and Bihar. However, it
hasn't been easy as it had to fight the likes of Hindustan in Bihar and
Dainik Bhaskar in Punjab (raged a cover price war). Hindustan is planning
to expand aggressively into UP by launching 12-13 new editions over the
next 2-3 years. Dainik Bhaskar has also gained significant marketshare in
Gujarat and Rajasthan. However, Newspapers aren't simply sticking to
geographic expansions. To truly expand their reach and widen their
readership base, several Publishing houses have launched new editions of
newspapers.
Page
17
houses like Dow Jones, News Corporation, APN News & Media, etc., which
enjoy a strong and diverse presence across media platforms. While BCCL
can be credited as the pioneer in terms of convergence in Print Media in
India, others like HT Media, Jagran Prakashan and Deccan Chronicle have
picked up fast entering most alternative media platforms including Radio,
Out-of-Home (OOH) advertising, Event Management, Internet Portals and
even Sports Management. Broadcasting majors like TV18, realising the
potential that Print Media offers, has tied up with Jagran Prakashan to
launch a Hindi financial daily. It has also picked up 40% stake in Infomedia,
a company with business operations pan across business directories, B2B
and B2C magazine publishing and publishing outsourcing. We believe such
new initiatives will not only help the companies to maximise the use of
their infrastructure and brands, it will also act as a stepping stone to
unlock shareholder value once these ventures attain significant size.
Page
18
Key Concerns
Rising Newsprint Prices
Page
19
$640MT levels in July 2006. The rise in newsprint prices during the period
was attributed to steady demand and cost push inflation. In FY2008
however, most Print Media companies reaped the benefits of lower
newsprint costs on account of the dual benefit of declining newsprint
prices and rising Rupee.
Indian companies, over the last several years, have been able to purchase
imported newsprint (largely from North America) at competitive prices
owing to a positive supply scenario (vast capacities created by
international newsprint manufacturers), declining demand in UK and parts
of Europe and strong push by Chinese newsprint companies into the
Indian market. But, the scenario has now changed. At the beginning of
CY2007, global demand for newsprint was 38.3mn tons while the global
supply was at 40.5mn tons - a surplus of 2.2mn tons. However, by the end
of 2007, several mills closed down resulting in a shortage of 2mn tons
taking the prices up. Newsprint prices in CY2008 have already risen 10-
12% to US $640MT levels with more hikes anticipated in the near future.
We attribute the sharp rise in global newsprint prices to the following
factors:
Rising crude prices - High crude prices at US$100-105 per barrel are
pushing up freight rates as well as the cost of production of newsprint, a
highly energy-intensive process.
Newsprint prices to stabilise post 2HCY2008
We expect newsprint prices to remain firm and rise to higher levels in the
near term. However, we note that newsprint demand in the US, the largest
consumer, has declined by 10.8% yoy in CY2007 and is expected to
remain subdued. Besides, the strong domestic demand in China is more of
a transitory phenomenon and is likely to witness moderation in 2HCY2008
leading to better supply situation. For our Print Media universe, we have
modeled in an 18% rise in newsprint prices in FY2009E from $600/ton as a
base case followed by a 6% jump in FY2010E. Our Sensitivity Analysis
indicates the impact of an additional 100bp rise on EBITDA and PAT on our
base case assumptions for the different companies. We believe HT Media
is the most sensitive to newsprint price hikes owing to its large circulation
base, higher use of imported newsprint and higher pagination compared
to its peers.
Page
21
Rising cost pressures likely to lead to industry consolidation
If newsprint price hikes sustain at this rapid pace for another few quarters,
we believe the smaller publishers, which largely depend on circulation
revenues, will likely witness sharp erosion in profitability rendering their
business model unviable. The large newsprint publishers are in a better
position to absorb the hikes owing to their strong Margin profile, high
Operating leverage and ability to garner high amount of advertising
revenues. Moreover, most large publishing companies have strong cash
flows and balance sheet, which gives them the additional advantage to
explore acquisition opportunities, which arise due to changing business
dynamics. We believe the Newspaper publishing companies are likely to
use a combination of counter-strategies to mitigate the impact of rising
newsprint prices to protect their Margins and remain competitive.
Page
22
Slowdown in economy
The advertising industry, the bellwether of Print Media revenues in India,
tends to exhibit a strong correlation with GDP growth. Moreover,
newspaper publishing business in India is moving towards the free paper
model (in-line with western countries) where readers are highly subsidized
(especially in case of English newspapers) increasing dependence of Print
companies on ad revenues. Thus, any significant slowdown in the
economic growth can have a direct impact on Print Media companies'
revenue and profitability.
Page
24
Globally, Print Media companies usually command premium valuations
owing to the unique nature of their business model, which entails high
operating leverage and generates strong free
cash flows. This allows Print Media companies to venture into new
businesses/ alternative media platforms and emerge as a complete media
house, which further improves their bargaining power with advertisers and
expands their total advertising pie.
In line with these global trends, our Print Media universe also commands
premium valuations to the benchmark indices and their global peers. We
expect this premium to sustain on account of the following:
Page
25
11, India is expected to register a much stronger 14.5% CAGR during the
same period.
We have valued the companies in our coverage on DCF basis for their core
Print Media business and used sum-of-the-parts (SOTP) method to derive
the Target Prices in case of multiple businesses ascribing different values
to each business. To negate the uncertainty regarding newsprint prices,
we have modeled in an additional 1% stock risk premium in our DCF
model for all the companies implying a higher WACC.
Page
26
Page
27
Jagran Prakashan
Page
28
Printed to Lead
Jagran Prakashan (JPL), with 37 editions of its flagship Hindi daily Dainik
Jagran, is the leading newspaper publisher in the country. Strong
advertising growth owing to rate hikes, rising proportion of colour ads and
high differential between English and Hindi daily ad rates is expected to
boost JPL's Margins.
Page
29
Business Overview
JPL derives majority of its revenues from its core Print business comprising
advertising and circulation revenues. In FY2007, the company earned
Rs388cr advertising revenues, which accounted for almost 65% of total
revenues. Circulation revenues accounted for 28% of total revenues
amounting to Rs168cr. The other businesses OOH and Event Management
accounted for the balance 7% of revenues. JPL derives a higher portion of
its revenues from circulation compared to its English counterparts on
account of higher cover price, larger circulation base and lower ad rates.
The English newspapers, on an average, derive 85% of their revenues
from
Page
30
Advertising.
Dainik Jagran is the leader in its home market Uttar Pradesh, with around
51% market share in terms of readership (IRS 2007 R2) and enjoys almost
a near monopoly position in key cities like Kanpur and Lucknow. The
company started its operations in UP way back in 1947, with its Kanpur
edition and has since expanded to almost 14 editions including the three
new editions of Rai Bareily, Ayodhya and Mathura, which were recently
launched. Owing to its strategy of focusing on local news coupled with
large number of sub-editions and innovative supplements, Dainik Jagran
continues to be the No1 publisher in the state. Dainik Jagran’s main
competitors in UP include Amar Ujala and Hindustan. Uttar Pradesh is
expected to remain the key focus market for JPL in the future as well as it
accounts for almost 50-55% of its advertising revenue and 60-65% of
circulation revenue for JPL.
Page
31
Dainik Jagran’s footprint covers entire Hindi belt (except
Rajasthan)
After consolidating its position in its home market, Jagran entered other
Hindi speaking states to capture a larger pie of readers thereby increasing
its circulation and advertising revenue potential. The company launched
the Delhi edition in 1990, entered Punjab in 1999, Bihar and Haryana in
2000, Jharkhand in 2003 and Jammu and Himachal Pradesh in 2005. It also
has a presence in Madhya Pradesh (3 editions) through its associate
company and is present in West Bengal through its Siliguri edition.
Post FY2000, the company has been on an expansion spree launching 18-
20 editions most of them outside its home market. With the recent
launches (five editions – Rai Bareily, Ayodhya, Mathura, Haridwar and
Bhatinda), the company now has totally 37 editions spanning the entire
Hindi Belt (covers almost 40% of the country’s population) and enjoys a
dominant No2 position in the states of Uttaranchal, Punjab, Haryana and
Bihar.
Page
32
Most editions of Jagran have already achieved breakeven barring 8-9
editions, which were launched in the past 3-4 years including the Punjab
editions (owing to severe competition from Dainik Bhaskar). Going ahead,
we believe Jagran will focus on consolidating its position in its existing key
regions, and growth is likely to come from further penetration in these
under-developed markets. A buoyant economy, rising disposable incomes
and improving literacy coupled with Jagran's strong brand franchise should
help it achieve steady circulation growth in the future.
Moreover, the fact that out of the 359mn literates who do not read a
newspaper, 68% can read Hindi and a large chunk of this populace resides
in the Hindi belt also works in favour of a strong player like Jagran.
Page
33
JPL sustain robust advertising growth in the future. We estimate
advertising revenues to grow at a CAGR of 27% over FY2007-10 to
Rs796cr giving a strong boost to its Margins as higher advertising
revenues flow directly to the Bottom-line. We expect UP to remain the key
revenue driver accounting for more than half of the advertising revenues
in FY2010.
Ad rate hike to sustain: Rising disposable incomes/ literacy rates in its
key markets coupled with high differential between English and Hindi daily
ad rates is expected to help JPL sustain its ad rate hikes. We have factored
in a 12.8% CAGR growth in blended ad rates during FY2007-10. In March
2008, Jagran implemented its annual ad rate hike for FY2009 increasing all
edition rates by 35% and UP/ Uttaranchal edition rates by 44%
respectively, for B&W display ads.
Better inventory utilisation: Jagran's launches in the past five years are
nearing maturity and
we expect this to drive an improvement in inventory utilisation rates from
the current 75% to 80% over the next 2-3 years.
Page
34
country's population. The factors favouring Jagran and which are expected
to support the strong growth in advertising rates include:
Jagran is either No1 or a strong No2 in most of its key markets due to
which it garners a substantial share of advertising revenues in those
regions. Moreover, advertisers have entered these markets only in the last
few years making them some of the fastest growing markets in terms of
print advertising spends due to their low base.
Jagran's advertising revenue pie is tilted towards the local ads owing to
its presence in under-developed markets. The current local: national ads
mix is 55:45 as against the reverse a few years ago. This works in favour
of the company as local ads yield higher rates and are less sensitive to
advertising budget rationalisations in the event of a slowdown in the
economy. Moreover, we expect this trend in local advertising to further
accelerate on the back of higher penetration in Tier-II and III cities by
retailers, which tend to localise their advertising campaigns.
Page
35
Over the last several years, Jagran has witnessed a change in its
advertising mix in terms of Colour and B&W space sold, wherein the
proportion of colour advertisements has increased from 20% in FY2005 to
almost 35% in FY2007. This has worked in favour of the company as
colour ads command a 25-40% premium over B&W ads. In case of Jagran,
the premium is even higher owing to the limited availability of colour ad
inventory. Moreover, incremental cost of printing colour ads is marginal,
with additional revenue directly percolating to the Bottomline. We expect
the proportion of colour ads to rise to almost 47% in FY2010 supported by
augmented colour capacity and rising demand for colour space in Jagran's
key markets. This is expected to give further impetus to Jagran's overall
advertising revenue growth going ahead.
Jagran Prakashan is the leading daily in the Hindi Print space which
accounts for around 25% of the total Print advertising pie. However,
realising the need to capture a bigger pie and pressed by competition in
its key markets, JPL has initiated several new ventures. In line with this
strategy, JPL has selectively entered the English Print Media with the
launch of two new offerings viz., City Plus (English weekly infotainment)
and I-Next (bilingual compact tabloid) in its existing as well as new
markets. We expect these offerings to act as a flanking brand to ward off
competition for its main brand, Dainik Jagran, and build a new growth
engine for the company in the future. We forecast combined revenues of I-
Next and City Plus to grow at a fast paced CAGR of 102.5% over FY2008-
10 to Rs57cr and account for almost 5% of total revenues in FY2010
(estimated at Rs14cr in FY2008). JPL has also entered into a joint venture
(JV) with TV18 to launch a Hindi/Regional business dailies. It is also
planning a facsimile edition of The Independent in India.
Page
36
City Plus - marks selective entry into English Print
City Plus: Launched towards late 2006, City Plus is a 'youth focused'
English infotainment weekly. The paper includes largely local content like
information on movies, markets, shopping, entertainment and weekend
events and is distributed at places with large footfalls like malls, airports,
clubs, BPOs, restaurants, etc. As the newspaper is distributed free (first
free newspaper launched by a large print media house), the only source of
income for the company is advertising revenue. Each edition is expected
to achieve a turnover of around Rs1cr once established. The paper is
mainly in colour and maintains high 60:40 advertising: editorial ratio.
Jagran has already launched nine editions this far and primarily in its
existing markets (eight in Delhi/NCR and one edition in Bangalore). It plans
to launch 14 editions of City Plus by 2HFY2009 and scale it upto 30 by end
FY2010. According to management, City Plus has already achieved a
weekly circulation of 1.72 Lakh copies.
Page
37
Hindi space is already facing heightened competition, with Economic
Times and Business Standard launching their Hindi business daily
versions. Even Amar Ujala is expected to enter this space. While we
remain optimistic on the long-term potential of the JV, we haven't factored
in any numbers in our projections due to lack of operational details.
Jagran derives almost 90% of its revenues from its core business of
publishing newspapers. However, realising the need to de-risk its business
model and reduce dependence on a single media vehicle, the company
branched out into alternative platforms like OOH advertising and Event
Management. It has also entered into a tie up with Yahoo! to co-brand its
Internet portal.
Entry into such emerging and fast growing platforms has given Jagran
access to an additional 8-10% advertising pie expanding its horizons
beyond just Print Media. Moreover, it also allows Jagran to cross-leverage
on its expertise in Print Media to offer a more diverse mix to its clients in
terms of advertising options. This reinforces our confidence in the
management to focus on long term value creation and improves the
overall visibility in terms of future growth.
Page
38
Termed as a primitive and fragmented segment in India, OOH advertising
is finally picking up owing to steady infrastructure development and
higher investments by organised media corporates. The Indian OOH
advertising industry currently stands at Rs1,250cr and is expected to grow
at a CAGR of 14.5% during CY2007-11 to Rs2,150cr (Source: FICCI-PwC
Report on Indian Media, 2008). We believe Jagran is well placed to encash
on this opportunity owing to:
Jagran's strategic tie up with Independent News and Media (INM owns
20.8% stake in JPL)
provides a substantial edge to the company over its competitors by way of
technical expertise and support. INM is a strong player in the outdoor
advertising market in Australia, New Zealand, South East Asia and South
Africa through its stakes in APN News and Media and Clear Channel
Outdoors. It owns 75,000 outdoor panels and registered a revenue of
Euros 136mn in CY2006 from its Outdoor Division alone.
Jagran Engage typically operates its sites on a lease model i.e., it leases
sites from third parties, which are then on-leased to its clients at higher
rates typically for three month period. As the business matures, Jagran
plans to move to an ownership model, which will ensure higher returns
and better control. Currently, the business is operating at 65-70%
utilisation levels and is clocking monthly revenues of Rs3-4cr. Overall
though, the business is registering losses. But, by 1QFY2009, it is
expected to achieve breakeven. Jagran has already started consolidating
its media properties by taking a decision to quit non-remunerative sites.
After establishing its position in the bigger towns, Jagran is once again
training its eye on its home market to achieve better returns with lower
investment. Management expects this segment to record EBITDA and PAT
Margins of 23-25% and 12-15% respectively once the operations stabilise.
We estimate this Segment to grow its revenues at a CAGR of 68% over
FY2007-10 to Rs85cr (Rs18cr in FY2007).
Page
39
infrastructure and comprehensive media services offering gives Jagran a
natural edge over its competitors in this Segment, which typically offers
below-the-line marketing activities. We forecast revenues in this Segment
to grow at a CAGR of 51% over FY2007-10 to Rs43cr (Rs12.5cr in FY2007).
Internet Portal: Jagran has entered into an agreement with Yahoo! India
to launch a new co-branded Hindi News and current affairs Internet
property integrating Jagran's content online in e-paper format and
Yahoo!'s other services. Prior to this arrangement, Jagran.com was the
most visited Hindi portal in the world. Under the terms of the agreement,
Jagran and Yahoo! will share graphical and keyword advertising revenues
generated by the property. Both companies will also partner in distributing
Yahoo! India's search offerings.
We believe the step to offer its content online in electronic format is in line
with the global trend and has already been initiated by most print media
companies in India. This should help Jagran avoid losing its readers as new
media habits develop and digital formats evolve. However, we remain
wary of its ability to monetise such offerings in meaningful terms at least
in the short run. Hence, we have not factored in any incremental revenues
in our projections from this tie-up.
Other Businesses: Besides its Hindi daily, the company also publishes
magazines like Sakhi, a monthly magazine targeted at women, Jagran
Varshiki, an annual general knowledge digest and
various national and state statistical compilations. The company also
operates a separate mobile value-added services division called J9, which
runs a short code service (7272) providing mainly SMS related services.
The company earns revenues from operators for providing the services on
a sharing basis. Jagran also proposes to launch a classifieds vertical under
J9. The company also runs a home shopping network, which it plans to
expand and has already tied up with a Kolkata-based company for
logistics.
Financial Outlook
Page
40
inventory utilisation of space sold. In terms of circulation revenues, we
expect Jagran to post a CAGR growth of 6.7% during the period aided by
addition of I-Next to its portfolio and its focus on consolidating its position
in its existing markets. Alternative media vehicles viz., OOH and Event
Management, put together are expected to register a strong CAGR growth
of 61.4% in Revenues during the mentioned period largely owing to low
base, strong industry growth rates and technical support from INM.
Page
42
Page
43
Key Concerns
Rising Newsprint Prices
During 9MFY2008 Jagran reaped the benefits of low newsprint prices and
strong advertising growth leading to an almost 340bp Margin expansion.
In case of Jagran, Newsprint costs account for 50-55% of total expenses
and circulation revenues cover 70-75% of the newsprint costs. During
9MFY2008, the newsprint prices were on a downturn at $580-600/ton.
However, owing to capacity rationalisations in the North American
newsprint market (major supplier), prices have again started picking up
with the first rate hike of 10-12% already implemented in January 2008
and we expect more to follow. The Sensitivity Analysis throws light on the
impact of the rise in newsprint prices on PAT. We have assumed 18% rise
in newsprint prices in FY2009E from $600/ ton as a base case followed by
a 6% jump in FY2010E. While Jagran is best placed amongst its
counterparts to battle the rise in newsprint prices (owing to its mix of
65:35 in favour of domestic newsprint, which is cheaper and lower
pagination), any additional rise in newsprint prices could impact our
forecasts.
Advertising Revenue is the key growth driver for the company and
contributes 65-70% of its revenues. However, advertising revenues are
linked to overall GDP growth. Hence, any slowdown in the overall economy
can adversely impact Jagran's revenues.
In the past, Jagran has successfully entered new markets and established
its position. Moreover, it continues to be the leader in UP and is a
dominant No2 in states like Uttaranchal, Punjab, Haryana and Bihar.
However, intense competition (as witnessed in the case of Punjab with
Dainik Bhaskar) in its key markets can adversely impact JPL's circulation
Page
44
revenues thereby hitting its profitability. Players like Hindustan in UP and
Amar Ujala is Punjab are already planning major activities.
Page
45
We rate Jagran Prakashan (JPL) as our top pick in the Print Media sector
and believe current underperformance of the stock offers attractive entry
point for investors. At the CMP of Rs88, he stock is trading at 14.5x
FY2010E Earnings and 8.7x EV/ EBITDA. We have used the DCF
methodology to value the company owing to its steady cash flow
generation in the future.
Assuming a WACC of 12.9% (including an additional 1% stock risk
premium owing to uncertainty surrounding newsprint prices) and a
terminal growth rate of 6%, our FY2010E Target Price works out to Rs125
at which the stock would trade at 20.6x in line with its two-year forward
P/E band of 19-24x.
We Initiate Coverage on the stock, with a Buy recommendation.
At our DCF-based Target Price of Rs125, the stock would fetch
handsome returns of 42% from current levels.
Page
46
Page
47
Page
48
Page
49
Page
50
HT Media
Time to ‘Mint’
Page
51
Business Overview
HT Media, with its rich heritage and diversified brand portfolio, is one of
the largest Media companies in the country today. A dominant player in
the Print Media (second largest in revenue terms), its two dailies HT
(English) and Hindustan (Hindi) are amongst the leading dailies in their
respective segments. The company also publishes two Hindi monthly
magazines, Nandan (targeted at women and children) and Kadambini
(targeted at the Hindi literary readers) HTML has adopted the route of
strategic partnerships to achieve the status of a media powerhouse. In
2007, the company launched Mint, its business daily, with an exclusive
agreement with Wall Street Journal. Recently, it tied up with BCCL to
launch a city centric daily tabloid called MetroNow in Delhi. Expanding its
horizons beyond the Print Media, the company has entered the Radio
segment in partnership with Virgin Radio UK by launching Fever 104 Radio
station.
Page
52
HT Media belongs to the KK Birla group. Dr Birla, a renowned industrialist,
has established one of India's well-known business conglomerates,
spanning a wide spectrum of key industries like sugar, fertilisers,
chemicals, heavy engineering, textiles, shipping and media. HTML has on
its Board of Directors eminent personalities like Shobhana Bhartia
(Editorial Director of HTML - 20 years of experience in newspaper
industry), YC Deveshwar (ITC - Chairman), Ajay Relan (MD - India,
Citigroup Venture Capital International) and KN Memani (ex- Chairman and
Country Managing Partner of Ernst & Young). Moreover, its editorial team
is rated as one of the best in the industry owing to quality staff like Pankaj
Paul (Editor-in-Chief, ex- Managing Editor of The News Journal in
Delaware), Raju Narsetti (Chief Editor - Mint, worked as Editor of the WSJ's
European edition), Mrinal Pande (Editor of Hindustan) and Vir Sanghvi
(Advisory Editorial Director, a prominent TV anchor and journalist)
Investment Argument
Emerging diversified media play
Only Print Media House with a top 3 position in both Hindi and
English domain
Page
53
Media House in India with a top 3 position in both Hindi and English
domain.
Page
54
Hindustan Times - A solid platform
Page
55
HTML derived almost 77% of its revenues in FY2007 from its flagship daily,
Hindustan Times of which 92% came from advertising and balance from
circulation. While HT Delhi remains the key market in terms of contribution
(accounted for 61% of total revenues), HT Mumbai is expected to remain
the key growth driver for the publication. We expect Hindustan Times to
post a CAGR of 13.6% in overall revenue during FY2007-10 largely on the
back of steady growth in advertising revenues.
Delhi, a duopoly (TOI and HT), is the country's second largest Print market
in terms of advertising revenues (next only to Mumbai). Over the years,
HT has maintained its leadership position in Delhi while combating
aggressive competition from TOI, which throws light on its strong brand
equity. In 2005, HT ended a 10-year cover pricing war with TOI raising its
cover price from Rs1.5 to Rs2 and subsequently to Rs2.5 in 2006. More
recently, TOI and HT came together to launch a daily tabloid called
MetroNow as a flanking strategy against new entrants. We rate Delhi as a
mature market (expect 10-12% growth in advertising revenue) in terms of
Print Media and expect no significant competition for the duo in the future
as both the players are well established and have very old relations with
advertisers and distributors in the region. Moreover, due to exhaustive
offerings from both the players there is hardly any value a new publication
can offer to the Delhi readers.
Delhi is the single largest market for HT in terms of revenue accounting for
almost 78% of the publication's revenue and 61% of total revenue for the
company (both advertising and circulation revenue combined for FY2007).
We expect Delhi to remain the mainstay for HT owing to its dominant
position in the market and large circulation and readership base. However,
we expect the contribution of HT Delhi in total revenue of HTML to decline
to 50% in FY2010E owing to significant scale up in Mumbai operations of
HT along with planned expansion of Hindustan in UP. We have factored in
a 10% CAGR in HT Delhi's overall revenues over FY2007-10E largely on the
back of 10.6% CAGR in advertising revenues. HT has witnessed a
significant slowdown in ad revenues in the Delhi market in 9MFY2008
owing to poor bookings by the Real Estate and Auto Sectors (partially
owing to higher base). We believe this situation is likely to improve in the
future and expect HT Delhi to continue to benefit from scale up of its
Mumbai edition (owing to ad-bundling packages).
Page
57
HT entered Mumbai, the country's largest Print media market in terms of
ad-spends, in July 2005 simultaneously with DNA, which was also launched
during the same period. Traditionally, a monopoly of TOI, entry of HT and
DNA into the Mumbai market marked a new era of competition, which saw
TOI respond with launch of its daily tabloid Mumbai Mirror. However,
backed by heavy discounts and aggressive subscription schemes, the new
dailies helped expand the Mumbai market, which still lags Delhi in terms
of circulation. Both dailies have garnered a decent subscriber base with
TOI still leading the race followed by DNA and HT. However, HT Mumbai
continues to remain loss-making owing to heavy marketing expenses and
lower ad revenues (not enough to cover fixed costs).
Since its launch, HT Mumbai has grown its readership base, albeit at a
slower pace, and is well placed to exhibit strong growth traction on
account of the following:
Page
58
Ability to offer bundle packages a key advantage - HT's ability to offer
bundle packages for the
top two print markets (Mumbai + Delhi) gives it a significant edge over
some of its competitors like DNA boosting the publication's revenue
prospects in both regions.
Hindustan, the company's Hindi offering, is the third most widely read
Hindi daily in the country, with a total circulation of 1.1mn (ABC JD 2006)
and readership base of 8.6mn (IRS 2007 R2). The newspaper has eight key
editions (Delhi, Patna, Ranchi, Lucknow, Kanpur, Agra, Varanasi and
Meerut). Hindustan is the leader in Bihar and has consistently been
maintaining a wide gap from its closest competitor in terms of both
readership and circulation. Hindustan is also a strong player in regions like
Jharkhand and Delhi.
Page
59
We believe Hindustan is well placed to capture the huge potential offered
by the Hindi newspaper market owing to the following reasons:
To harness the full potential that Hindustan has to offer and to improve its
focus on the segment, HTML has already transferred Hindustan into a
separate wholly-owned subsidiary. While value unlocking at this stage
looks less likely (owing to the current stock market turmoil), we believe
HTML is well placed to fund Hindustan's expansion plans from internal
accruals.
Over the past couple of years, HT Media has made conscious efforts to de-
risk its business model and dependence on its existing properties by
entering into complementary businesses where it can leverage its brands,
existing customer base and infrastructure. It has successfully adopted the
route of strategic partnerships to exploit such synergistic opportunities
and we believe HTML stands to benefit immensely from its range of new
initiatives over the long term.
Mint has been launched in association with Wall Street Journal (WSJ),
which contributes 4
Page
61
pages of content daily (out of total 24 pages) giving the newspaper an
edge in international
reporting. Moreover, Raju Narisetti, editor of WSJ Europe, has been
appointed as the Managing Editor of Mint. WSJ does not have any equity
stake. The partnership only entails a management fee for the services.
Mint is the first white business newspaper in the country which is sized
between a tabloid and broadsheet (Berliner) making it easier to read. The
layout of Mint is highly differentiated from other business dailies and
includes an index on page 2 for easy navigation. It focuses on more news
and analysis and publishes regular contributions from renowned industry
experts.
Page
62
HTML entered the Radio segment with launch of its FM channel Fever 104
in association with Virgin Radio, UK (consulting partnership). The radio
business is housed in a separate subsidiary company, HT Music and
Entertainment, in which HTML has 75% stake and its parent Hindustan
Times owns the balance 25%. During the Phase II license distribution, it
acquired licenses for four territories (one-time fee of Rs75cr for 10 years)
all of which are now operational including the recently launched Kolkata
radio station. Fever 104, was launched in Delhi (Nov 2006), Mumbai (Jan
2007) and Bangalore (March 2007) during the initial rollout. A youth
centric radio station, Fever 104, is credited as the first format station in
the country with a tagline 'More music…less talk'. The format has been
designed in consultation with Virgin Radio, which follows similar format
globally. Radio is one of the cheapest forms of entertainment in India
owing to its nature of being a free medium. Over the past couple of years,
the Radio industry has undergone major changes owing to liberal
government policies on licensing (Phase II) and foreign investment.
Although radio as a medium covers 99% of the population in India, its
share in overall ad spend is relatively low at 3.2% as against global
average of 7-8%. FICCI-PwC expects the Radio industry in India to register
a CAGR of 25% from Rs620cr to Rs1,500cr (3.8% of overall ad spend)
during the period CY2007-11.
Page
63
We believe HTML's entry into the Radio segment is a well thought out
strategy to cross leverage from the synergies arising out of two segments,
which involves high amount of local advertising. It would also help HTML
de-risk its Print business and capture a bigger pie of advertising. According
to management, Fever 104 has already achieved 10-12% volume share in
Delhi and Bangalore, and Mumbai station is also nearing similar share. In
value terms, it is already a number three or four player in its key markets.
The company's strategy to enter the most lucrative markets (the four
metros account for almost 40-50% of radio advertising pie) is in-line with
Virgin's global strategy in the Radio business to target key markets. We
believe this would help HTML develop a strong platform before entering
smaller markets. HTML has plans to bid for more licenses and multiple
licenses in the same city (when permitted) during the Phase III bidding
process. However, its strategy is to be a large-city group as returns on
investments in the smaller towns is relatively poor.
The 2008 FICCI - PwC Report on Indian Media pegs the Indian internet
advertising industry at Rs270cr in CY2007 and expects it to register a
CAGR of 37% over the next five years to touch Rs950cr in CY2011. HT
Media is well positioned to exploit the growing opportunities available in
the Internet domain, with a strong content database of more than 80
years.
Page
64
HTML has launched Livemint.com (to support business daily Mint), which
has the potential to develop into a fully integrated financial/economic
domain.
HTML has already launched the beta version of its online job portal
Shine.com. We believe HTML is working to create a diversified mix of
internet properties targeting a range of audiences by leveraging on its
expertise in the Print domain and existing client base. The revenue model
of these websites is likely to be advertisement driven as competition
would make the subscription model unviable (owing to easy availability of
free content). However, for the classifieds, matrimonial and job portals, we
believe it would look at a combination model in-line with what most
industry players follow.
Page
65
Financial Outlook
Page
66
Over the last couple of years, HTML has registered lower circulation
revenue growth due to its aggressive subscription based model for HT
Mumbai, Mint and Hindustan (UP). However, we expect the Mumbai region
to achieve positive net circulation revenues in FY2009 and start
contributing meaningfully to circulation revenues in FY2010. We expect UP
region to be the key growth driver (factored in 23% CAGR in circulation
revenues from the region). On the operating front, we expect HTML to post
a CAGR of 21.2% in EBITDA to Rs338.9cr during FY2007-10 owing to
steady advertising revenue growth, strong pricing power in its core market
Delhi and higher operating leverage (plays a major role in Print Media
business owing to higher fixed costs). Moreover, reduction of losses in HT
Mumbai and Mint editions (as they achieve better traction in terms of
advertising revenues) will also arrest the Margin fall. However, we have
modeled in a decline in OPM of 90bp for FY2009E followed by a 180bp
expansion in FY2010E owing to following:
Still some more pain for HT Mumbai and Mint - While we have factored
in lower losses for HT Mumbai and Mint during the next couple of years,
we believe breakeven for both the properties is still a year away. We
expect Mint to achieve full breakeven in FY2010 owing to its lower ad-edit
ratio and expansion mode (HTML is planning a pan-India presence for the
daily). HT Mumbai is expected to turn-around only in 2HFY2009 owing to
strong competition in the Mumbai market entailing high marketing
expenses.
Rise in newsprint prices: Since January 2008, the newsprint prices are
on a significant uptrend and have already risen by 10-12%. Newsprint
Page
67
costs account for almost half of the expenditure for the company. We
expect HTML to take a hit of 360bp in its Gross Margins in FY2009
(modeled a 18% hike for the year in newsprint prices) owing to this steep
rise coupled with higher circulation (owing to scale up in Hindustan, Mint
and launch of MetroNow).
Page
68
Key Concerns
Rising Newsprint Prices
Execution risk
Even though HTML has time and again proved its expertise in launching
new editions and entering new markets and segments, we believe any
delay in execution of its expansion plans in UP, scale up of its business
daily Mint and its Radio business Fever 104 FM, will have a negative
impact on our earnings forecast for the company.
We believe this sharp fall offers an attractive entry point for investors to
enter into an emerging national media play. At the CMP of Rs147, the
stock is trading at 16.1x FY2010E Earnings and 10.3x EV/ EBITDA.
Page
71
Rs13 for the Radio business (accounting for only 75% stake held by HTML
in the venture).
For the core Print Business, we have assumed a WACC of 12.8% (including
an additional 1% stock risk premium owing to uncertainty regarding
newsprint prices) and terminal growth rate of 5% (lower than Jagran
Prakashan owing to HTML's dominant presence in mature markets). On
FY2010E basis, our DCF-based Target Price for HTML's Print business works
out to Rs187, which implies a P/E multiple of 19.7x FY2010E (at a discount
to its historical trading range).
Page
72
Page
73
The following table outlines a sensitivity analysis on fair value of the Print
Media business based on different scenarios of WACC and Terminal Growth
Rates.
Page
74
Page
75
Page
76
Page
77
Deccan Chronicle
A Southern ‘Chronicle’
Page
78
Business Overview
Deccan Chronicle, a dominant player in South India, publishes
India's fourth largest English daily
Page
79
Apart from its core business of publishing newspapers, DCHL has two-
wholly owned subsidiaries viz., Odyssey India and Sieger Solutions.
Odyssey India, acquired by DCHL in September 2005, is a leisure retail
store chain selling books, music, cards, stationary, multimedia and
magazines. It has a presence in 12 cities through 24 stores. Sieger
Solutions, formed in July 2006, handles media space selling for DCHL.
Through Sieger Solutions, the company also plans to foray into alternate
media platforms such as internet portals and satellite radio.
Page
80
We believe DCHL is well placed to capture the strong growth in advertising
revenues from the Southern markets owing to its youth-based
infotainment positioning, low cover prices and higher number of colour
pages. While its huge cash reserves provide it an added advantage, its
execution and ability to tackle competition in the new markets will remain
the key to sustainability of its growth.
Andhra Pradesh (AP) is DCHL's home market and remains the backbone of
its operations generating strong revenues and cash flows. Deccan
Chronicle is a dominant market leader in AP accounting for almost 60% of
the readership. It publishes seven editions in the region (Hyderabad,
Vijaywada, Rajahmundhry, Vishakapatnam, Anantpur, Karimnagar and
Nellore). Over the last three years, it has grown its circulation in the region
at almost 21% CAGR despite competition from The Hindu and Times of
India (TOI). Rich history dating back almost 70 years, a larger set of
offerings (with highly localised content) and higher pagination has helped
DCHL maintain its stronghold in the region.
Page
81
Cashing in on its strong positioning in the state, DCHL has managed to
grow its revenues from AP almost 4x during FY2004-07 from Rs99cr to
Rs401cr in FY2007 (Angel estimates). Significant ad rate hikes, more
colour ad space (colour commands a premium over B&W rates) and better
inventory utilisation have contributed to this strong ad revenue growth.
Moreover, despite its leadership position DCHL still continues to be a cost
effective medium for advertisers in AP which should allow DCHL to sustain
modest ad rate hikes even in the future.
Page
82
Chennai - A successful foray
Owing to poor competition, a weak No2 in the form of New Indian Express
and absence of TOI, DCHL was able to ramp up its operations in Chennai
garnering a significant chunk of advertising revenues. We estimate DCHL
to account for almost 25% share of the Rs650-700cr Chennai Print
advertising market in FY2008. We estimate its revenues from the Chennai
market to grow at a CAGR of 29.5% during FY2007-10 to Rs267cr largely
driven by a CAGR of 32% in advertising revenues to Rs253cr. However, we
believe DCHL's growth story in Chennai has reached a plateau and is likely
to witness moderation owing to several factors.
Page
83
Firstly, DCHL's ad rates are at a slight premium to the leader The Hindu
in CPT terms despite its lower readership multiple. Hence, we believe
future growth is likely to come from better inventory utilisation of space
sold (particularly higher colour space) rather than ad rate hikes.
Finally, competition in Chennai is heating up. TOI has just launched its
Chennai edition. We believe this is a sound strategy by TOI to counter
attack DCHL (expected to enter Bangalore market in 1QFY2009 which is a
stronghold of TOI). Media reports suggest TOI is also adopting aggressive
cover pricing strategy, with an initial yearly subscription rate of Rs299. We
believe this could be the beginning of a price war in Chennai which has
seen even The Hindu react by reducing its prices to Rs2.5 (Rs3.25).
Moreover, Indian Express has also revamped its edition look. Generally in
such wars, players tend to reduce prices and ramp up circulation to
maintain their market position. This is likely to hurt DCHL the most owing
to its low cover prices, rising newsprint costs and slowdown in ad rate
hikes (owing to stiffer competition) impacting its overall profitability.
Post expansion into Chennai, DCHL plans to venture into the Karnataka
market by launching a Bangalore edition of its flagship daily. It has a
presence in Bangalore with The Asian Age al eit on a very small scale. The
company has already spent around Rs150cr to set up the infrastructure in
terms of printing facility and distribution network. Bangalore's attractive
demographics coupled with its fast growth in terms of print advertising
make it a strategic market for any player who wants to make it big in
South. Bangalore being an IT and BPO hub, boasts of a sizeable
cosmopolitan, high-earning and high-spending population, which is the key
attraction for English daily players like DCHL. Moreover, besides Mumbai
Page
84
and Delhi, Bangalore is rated as the next biggest market in terms of Print
advertising, with an estimated size of Rs700-750cr.
Content not to be the differentiating factor - Both TOI and DCHL enjoy a
similar positioning in
their key markets viz., a youth based infotainment newspaper. Moreover,
with the entry of daily tabloid, Mid Day, in June 2006, the space is already
getting competitive. Pertinently, the city is also on the radar of other
leading dailies like Hindustan Times (HT Media has entered Bangalore by
launching Mint) and DNA.
DCHL's foray into the Bangalore market has been doing the rounds since
almost a year now. We have factored in the launch towards late 1QFY2009
(management had guided for a 4QFY2008 launch), with an initial
circulation of 100,000 copies at a cover price of Rs1.5 splitting the
competition midway (TOI has an estimated circulation of 350,000 and
Deccan Herald around 80,000 copies). We expect DCHL to register Rs34cr
advertising revenue from the region in FY2009 growing to Rs62cr in
FY2010.
Page
85
DCHL enters Business Daily market
DCHL recently entered the Rs560cr Business daily market, by launching its
newest print offering, Financial Chronicle simultaneously from Hyderabad
and Chennai. The daily business broadsheet, priced at Rs1.50, has an
initial combined print run of around 70,000 copies. In the future, DCHL
plans to extend the daily to Bangalore, Mumbai and Delhi. We remain
cautiously optimistic on DCHL's foray into this space as it is already
crowded with several offerings by large Print Media houses. We have not
factored the potential revenue/earnings from this offering into our
projections due to lack of operational details.
DCHL has two wholly-owned subsidiaries viz., Odyssey India and Sieger
Solutions. Odyssey India, acquired by DCHL in September 2005, is a
leisure retail store chain selling books, music, cards, stationary,
multimedia and magazines. Sieger Solutions, formed in July 2006, has
been established to handle media space selling for DCHL. Through Sieger
Solutions, Deccan Chronicle also plans to foray into alternate media
platforms such as internet portals.
Odyssey Retail
DCHL marked its foray into organised retailing when it acquired 100%
stake in South-based retail chain Odyssey India in September 2005 for
Rs61.4cr (3.3x FY2005 sales of Rs18.6cr). Primarily a bookstore, Odyssey
retails a vast collection of gifts, toys, music and other stationery goods.
Starting with a 3,500 sq ft store in the southern suburb of Chennai - Adyar
in 1995, Odyssey now occupies 142,373 sq ft of retail space through its 24
stores spread across the country. The chain receives over three million
walk-ins every year.
Page
86
DCHL management has been trying to unlock value in Odyssey India by
coming out with its IPO. It even filed a draft RHP with SEBI in April 2006
but later withdrew the proposal. Almost two years have passed and the
fund-raising plans still remain on paper. This has impacted Odyssey's
expansion plans as witnessed in its flat revenue growth of Rs26.3cr in
FY2007. Odyssey is already profitable at the PBT level and registered a
2.6% margin in FY2007. However, it registered a marginal loss at the PAT
level.
Odyssey has firmed up plans to increase its retail space from 142,373 sq ft
to 1.2mn sq ft over the next three years. This expansion would take the
company to new markets in metro and non metros, besides expanding in
its existing markets. Odyssey basically follows a dual format model under
which it opens either Express stores (smaller stores with less than 1,000
sq ft) or larger standalone stores (2,000sq ft+). Odyssey currently has six
express stores and 18 larger format stores (some even larger than 10,000
sq ft).
Page
87
Contrary to management guidance, we anticipate the store count to rise
to 72 by FY2010 with 19 Express stores and 53 larger format stores taking
the total space at almost 450,000 sq ft. We estimate revenues to grow by
almost 5x during FY2007-10 to Rs125cr and PAT to grow at similar pace to
Rs5.2cr. Timely roll out of the stores along with adequate funding would be
the key to Odyssey's expansion plans. However, owing to Odyssey's poor
track record on both fronts, we have valued the subsidiary at Rs61.4cr
(the purchase price paid by DCHL), which equates to Rs2.5/share value for
DCHL.
Sieger Solutions
Page
88
Indian Premier League (IPL) - DCHL enters Sports management
business
Deccan Chronicle has bagged the rights for the IPL team of Hyderabad for
US $107mn payable
over the next 10 years. The IPL Hyderabad rights would be a part of Sieger
Solutions. DCHL has named the team Deccan Chargers and has spent
around $5.9mn in annual fees to recruit 11
players. VVS Laxman has been appointed as the Captain of the team and
Adam Gilchrist the Vice Captain. Besides Laxman and Gilchirst, the team
includes Andrew Symonds, Herschelle Gibbs, Shahid Afridi, Rohit Sharma,
Rudra Pratap Singh, Scott Styris, Chaminda Vaas and Nuwan Zoysa. We
believe IPL poses an attractive long-term opportunity for the participating
franchises owing to its ability to attract significant advertising revenues.
From an economic perspective, we anticipate DCHL to register losses
under IPL in the initial years until the business achieves significant mass
following enabling higher revenue potential. In terms of funding, we
believe DCHL is well placed to fund the venture through internal accruals
and its huge cash balance. However, owing to lack of operational details
on the venture, we have not factored IPL into our projections for DCHL.
Page
89
Financial Outlook
During FY2007-10, we expect DCHL to post a CAGR of 24.1% in revenue to
Rs1,057cr aided by 25.2% CAGR in advertising revenues and 9.1% CAGR
in circulation revenues. We expect advertising to increase it share in total
contribution to almost 95% in FY2010 as circulation growth slows down.
Page
91
In terms of circulation, DCHL almost doubled its revenue during FY2005-07
driven by steady circulation growth in AP and its entry into the Chennai
market. DCHL has registered this strong growth despite a drop in
realisation per copy (owing to low pricing strategy adopted in Chennai).
Going forward, we expect circulation revenues to grow at a slower pace,
despite DCHL's Bangalore launch, owing to moderation in AP and Chennai
circulation. We have factored in an initial print order of 100,000 for the
Bangalore edition at a cover price of Rs1.5.
Page
92
Going forward, we expect DCHL to post a 30.9% CAGR in EBITDA to
Rs579.6cr during FY2007-10 aided by steady advertising revenue growth.
However, we believe it would be difficult for DCHL to sustain its high-
Margin model owing to stiffer competition in Chennai, initial losses on
account of Bangalore edition launch and higher newsprint prices.
We believe DCHL has already completed most of its capex. It has installed
state-of-the-art machinery from Goss International, which has to a large
extent automated the time consuming post-printing activities. Further, to
increase its printing capacity, DCHL has installed six such machines with
high capacity of printing up to 75,000 copies per hour. The company
incurred close to Rs475cr as capex during FY2005-07. Hence, we have
modeled in only regular capex during FY2008-10, which DCHL can easily
fund via its internal accruals.
DCHL had a cash balance of Rs333cr in FY2007 owing to money raised via
FCCB issue Rs242cr) and QIP (Rs224cr) during the period. While part of
the FCCB has been converted to Equity, Debt in FY2007 still stood at a
high Rs605cr (Debt:Equity of 0.7x). However, we expect Debt levels to
Page
93
reduce significantly going forward boosted by lower Capex requirement,
higher Operating Cash flows and retirement of FCCB (we have assumed
full conversion by end of FY2008E leading to a fully diluted equity capital
of Rs49.3cr).
Post entry into Chennai, DCHL's working capital requirements have risen
sharply owing to steep rise in receivables to almost 201 days in FY2007
(highest amongst peers as compared to Jagran's 70 days and HT Media's
51 days). DCHL's strategy of lenient credit terms to advertisers to boost
revenues in Chennai has led to this sharp increase in working capital
putting a significant strain to its Cash flows. Management has already
securitised its receivables of Rs300cr (FY2007) with ICICI Bank at a
discount of 12.5%, which has been adjusted in the Interest outgo in
FY2008. Post this securitisation, we expect the Debtor days to stabilise at
115-125 days (still higher than its peers) leading to a sharp improvement
in Cash flows (also aided by lower capex requirements).
We have used the DCF methodology to value the company to capture the
full impact of improving cash flows as receivables stabilise to 115-125
days level. We have assumed higher WACC of 15.5% for discounting
DCHL's cash flows owing to its higher beta (0.90 compared to HT Media's
Page
94
and Jagran's 0.65). In line with our conservative approach towards all Print
Media stocks, we have also modeled a 1% stock risk premium for DCHL to
account for uncertainty surrounding newsprint prices. However, in case of
DCHL, we have modeled in an additional 1% stock risk premium to
account for poor corporate governance and delays in execution of plans.
We have assumed a Terminal growth rate of 4% in our valuation for DCHL
(lower than Jagran and HT Media owing to its limited market presence).
Factoring in our assumptions, our Fair Value based on FY2010 estimates
works out to Rs164 (including Rs2.5 for Odyssey) at which the stock would
trade at a P/E of 10.6x (at the bottom end of its historical valuation band
of 10-14x two-year forward earnings).
Page
95
Concerns
Poor quality of growth
In FY2007, DCHL registered strong yoy growth of 67% in Topline and 138%
in Bottomline. Its Operating Margins also expanded by a whopping
1,525bp driving a yoy growth of 148% in EBITDA. However, despite such
phenomenal growth, its cash flow from operations was negative. This was
largely owing to the steep rise in its working capital requirement as its
receivables rose to almost 201 days (consolidated - 246 days) in FY2007
from an already high 150 days in FY2006. DCHL's strategy to offer lenient
credit terms to boost its Chennai edition revenues and to support the pre-
Bangalore launch were to blame. While management has securitised its
receivables with ICICI Bank, the logic and merit behind such an approach
to grow revenues eludes us. Firstly, receivables in Print Media companies
generally range between 60-90 days as most of the business is dealt with
INS accredited agencies (governing body for Print Media business), which
are required to pay within 90 days as per the norms. Generally, Print
Media companies derive almost 50% of their business from such agencies.
Hence, we fail to understand the build up in DCHL's receivables. Moreover,
such a lenient approach of boosting revenues through longer credit
periods also raises questions on quality and sustainability of its advertising
revenues. It also raises concerns over DCHL's limited bargaining power
with media buyers and its quality of readership/circulation despite its
strong position in AP and Chennai markets.
Page
96
Lastly, DCHL's promoter ownership has declined from 77.8% to 60.9%
since September 2006. During the period, the company issued around
38.75mn shares (on account of FCCBs and QIP) leading to almost 19.5%
dilution. However, our concern arises from the fact that the promoters
have sold 11.18mn shares (almost 7% of their holding) during the same
period. Moreover, to support its declining shareholding and heavy dilution,
the promoters announced a share buyback scheme at Rs250 upto
maximum of 5% of its equity. However, six months down, there have been
no further developments on this front. Moreover, given the sharp decline
in DCHL's share price it looks even less likely.
Competition in Chennai is heating up. TOI has just launched its Chennai
edition. We believe this is a sound strategy by TOI to counter attack DCHL
(expected to enter Bangalore market in 1QFY2009 which is a stronghold of
TOI). Media reports suggest TOI is also adopting aggressive cover pricing
strategy, with an initial yearly subscription rate of Rs299. We believe this
could be the beginning of a price war in Chennai which has seen even The
Hindu react by reducing its prices to Rs2.5 (Rs3.25). Moreover, Indian
Express has also revamped its edition look. This is likely to hurt DCHL
owing to its low cover prices, rising newsprint costs and slowdown in ad
rate hikes (owing to stiffer competition) impacting its overall profitability.
DCHL's circulation revenues cover a mere 20% of its raw material costs.
Hence, rising Newsprint prices (have already risen 10-12% in CY2008)
makes DCHL more vulnerable than Peers in case its ad rates witness a
slow down. We have assumed 18% rise in newsprint prices in FY2009E
from 600$/tonne as a base case followed by a 6% jump in FY2010E. Any
additional rise in newsprint prices could impact our forecast.
Page
97
Page
98
Page
99
Page
100